MICRON SOLUTIONS INC /DE/ - Quarter Report: 2010 August (Form 10-Q)
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D. C. 20549
FORM
10-Q
[ x
] Quarterly report
under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the
quarterly period ended June 30,
2010 or
[ ]
Transition report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
transition period from ______ to ______
001-9731
(Commission file
No.)
ARRHYTHMIA
RESEARCH TECHNOLOGY, INC.
(Exact
name of registrant as specified in its charter)
|
DELAWARE
|
72-0925679
|
|
(State
or other jurisdiction of incorporation
or organization)
|
(I.R.S.
employer identification no.)
|
25
Sawyer Passway
Fitchburg,
Massachusetts 01420
(Address
of principal executive offices)
(978)
345-5000
(Registrant's
telephone number, including area code)
Check
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No___.
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes __ No__
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer
[ ] Accelerated filer
[ ] Non-Accelerated filer
[ ] Smaller reporting company [ X
]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes __ No X
As of
August 10, 2010 there were 2,790,514 shares of the Company’s common stock
outstanding.
ARRHYTHMIA
RESEARCH TECHNOLOGY, INC.
TABLE OF
CONTENTS
FORM
10-Q
June 30,
2010
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X-1
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X-2
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X-3
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X-4
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ARRHYTHMIA
RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
|
ASSETS
|
June
30, 2010
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December
31,
2009
|
||||||
|
Current
assets:
|
(Unaudited)
|
(Audited)
|
||||||
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Cash and cash
equivalents
|
$ | 2,838,872 | $ | 3,674,179 | ||||
|
Trade and other accounts
receivable, net of allowance for
doubtful accounts of $79,976
and
$49,976
|
4,287,947 | 3,818,538 | ||||||
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Inventories,
net
|
3,006,824 | 2,956,682 | ||||||
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Deferred income taxes,
net
|
56,500 | 22,500 | ||||||
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Prepaid
tax
|
65,789 | 123,789 | ||||||
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Deposits, prepaid expenses and
other current
assets
|
381,240 | 147,243 | ||||||
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Total current
assets
|
10,637,172 | 10,742,931 | ||||||
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Property
and equipment, net of accumulated depreciation of
$10,927,735 and
$10,361,928
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6,595,909 | 6,343,575 | ||||||
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Goodwill
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1,564,966 | 1,564,966 | ||||||
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Restricted
cash
|
511,208 | - | ||||||
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Other
intangible assets,
net
|
83,870 | 95,887 | ||||||
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Total
assets
|
$ | 19,393,125 | $ | 18,747,359 | ||||
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LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
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Current
liabilities:
|
||||||||
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Accounts
payable
|
$ | 1,503,129 | $ | 1,543,700 | ||||
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Accrued expenses and customer
deposits
|
374,687 | 276,903 | ||||||
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Total current
liabilities
|
1,877,816 | 1,820,603 | ||||||
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Long
term liabilities:
|
||||||||
|
Long
term deferred tax liability,
net
|
173,266 | 350,000 | ||||||
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Long
term portion of deferred gain on
lease
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20,101 | 22,347 | ||||||
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Total long term
liabilities
|
193,367 | 372,347 |
|
|||||
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Total
liabilities
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2,071,183 | 2,192,950 |
|
|||||
|
Shareholders’
equity:
|
||||||||
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Preferred stock, $1 par value;
2,000,000 shares authorized, none issued
|
- | - | ||||||
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Common stock, $0.01 par value;
10,000,000 shares authorized,
3,926,491
shares issued, 2,790,514 and 2,675,481 outstanding
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39,265 | 39,265 | ||||||
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Additional
paid-in-capital
|
10,611,065 | 10,317,403 | ||||||
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Common stock held in treasury,
1,135,977 and 1,251,010 shares at cost
|
(3,099,842 | ) | (3,413,742 | ) | ||||
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Retained
earnings
|
9,771,454 | 9,611,483 | ||||||
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Total shareholders’
equity
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17,321,942 | 16,554,409 | ||||||
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Total liabilities and
shareholders’
equity
|
$ | 19,393,125 | $ | 18,747,359 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
1
ARRHYTHMIA
RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
(Unaudited)
|
Three months ended
June 30,
|
Six months ended
June 30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
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|||||||||||||
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Revenue
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$ | 5,782,279 | $ | 5,371,439 | $ | 11,367,639 | $ | 10,054,893 | ||||||||
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Cost
of sales
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4,687,802 | 4,496,306 | 9,289,014 | 8,235,447 | ||||||||||||
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Gross profit
|
1,094,477 | 875,133 | 2,078,625 | 1,819,446 | ||||||||||||
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Selling
and marketing
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255,637 | 183,729 | 413,626 | 334,180 | ||||||||||||
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General
and administrative
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671,862 | 512,391 | 1,275,859 | 1,087,895 | ||||||||||||
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Research
and development
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47,138 | 57,716 | 102,811 | 126,463 | ||||||||||||
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Total expense
|
974,637 | 753,836 | 1,792,296 | 1,548,538 | ||||||||||||
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Income from operations
|
119,840 | 121,297 | 286,329 | 270,908 | ||||||||||||
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Other
income (expense), net
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144,647 | (5,377 | ) | 144,769 | (19,210 | ) | ||||||||||
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Income
before income taxes
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264,487 | 115,920 | 431,098 | 251,698 | ||||||||||||
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Income
tax provision
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45,800 | 39,000 | 109,800 | 93,000 | ||||||||||||
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Net income
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$ | 218,687 | $ | 76,920 | $ | 321,298 | $ | 158,698 | ||||||||
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Net
income per share – basic
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$ | 0.08 | $ | 0.03 | $ | 0.12 | $ | 0.06 | ||||||||
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Net
income per share – diluted
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$ | 0.08 | $ | 0.03 | $ | 0.12 | $ | 0.06 | ||||||||
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Weighted
average common shares
Outstanding – basic
|
2,691,914 | 2,677,777 | 2,683,743 | 2,680,341 | ||||||||||||
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Weighted
average common shares
Outstanding – diluted
|
2,739,858 | 2,677,777 | 2,731,687 | 2,680,341 | ||||||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
2
ARRHYTHMIA
RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
(Unaudited)
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Six Months Ended
June 30,
|
||||||||
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2010
|
2009
|
|||||||
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Cash
flows from operating activities:
|
||||||||
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Net income
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$ | 321,298 | $ | 158,698 | ||||
|
Adjustments
to reconcile net income to net cash provided by
operating
activities:
|
||||||||
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Noncash gain from bargain
purchase
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(146,288 | ) | - | |||||
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Depreciation and
amortization
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698,440 | 691,694 | ||||||
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Share based compensation
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57,011 | 36,770 | ||||||
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Provision for doubtful
accounts
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30,000 | 11,091 | ||||||
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Deferred tax expense
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(48,200 | ) | 44,916 | |||||
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Changes in operating assets and
liabilities:
|
||||||||
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Trade and other accounts
receivable
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(499,409 | ) | (1,116,460 | ) | ||||
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Inventories
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(50,142 | ) | 136,026 | |||||
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Deposits, prepaid expenses and
other assets
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(184,891 | ) | 132,418 | |||||
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Accounts payable and accrued
expenses
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(27,286 | ) | 315,979 | |||||
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Net cash provided by operating
activities
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150,533 | 411,132 | ||||||
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Cash
flows from investing activities:
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||||||||
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Capital expenditures, net of
disposals
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(840,869 | ) | (634,572 | ) | ||||
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Acquisition activities
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16,357 | - | ||||||
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Net cash used in investing
activities
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(824,512 | ) | (634,572 | ) | ||||
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Cash
flows from financing activities:
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||||||||
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Payments on note payable
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- | (47,269 | ) | |||||
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Cash dividend paid
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(161,328 | ) | - | |||||
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Purchase of treasury
shares
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- | (33,188 | ) | |||||
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Net cash used in financing
activities
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(161,328 | ) | (80,457 | ) | ||||
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Net
decrease in cash and cash equivalents
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(835,307 | ) | (303,897 | ) | ||||
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Cash
and cash equivalents at beginning of period
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3,674,179 | 2,320,467 | ||||||
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Cash
and cash equivalents at end of period
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$ | 2,838,872 | $ | 2,016,570 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
3
1.
Basis of Presentation:
The unaudited interim consolidated
financial statements and related notes have been prepared pursuant to the rules
and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in complete financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations. The accompanying unaudited interim
consolidated financial statements and related notes should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Arrhythmia Research Technology, Inc. and subsidiary (the
“Company”) Annual Report on Form 10-K for the year ended December 31, 2009 filed
March 10, 2010.
The information presented reflects, in
the opinion of the management of the Company, all adjustments necessary for a
fair presentation of the financial results for the interim period
presented.
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Operating results for
interim periods are not necessarily indicative of results that may be expected
for the entire fiscal year.
2.
Inventories:
|
Inventories
consist of the following as of:
|
June
30,
2010
|
December
31,
2009
|
||||||
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Raw materials
|
$ | 822,620 | $ | 1,043,228 | ||||
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Work-in-process
|
302,129 | 243,360 | ||||||
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Finished goods
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1,882,075 | 1,679,094 | ||||||
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Total
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$ | 3,006,824 | $ | 2,956,682 | ||||
3.
Share-Based Compensation:
The Company accounts for non-cash share
based compensation under ASC 718 “Stock Compensation”, which establishes
accounting for equity instruments exchanged for employee
services. Under the provisions of ASC 718, share-based compensation
cost is measured at the grant date, based on the fair value of the award, and is
recognized as an expense over the employee’s requisite service period (generally
the vesting period of the equity grant).
The Company estimates the fair value of
stock options using the Black-Scholes valuation model. Key input
assumptions used to estimate the fair value of stock options include the
exercise price of the award, the expected option term, the expected volatility
of the Company’s stock over the option’s expected term, the risk-free interest
rate over the option’s expected term, and the Company’s expected annual dividend
yield. The Company believes that the valuation technique and the
approach utilized to develop the underlying assumptions are appropriate in
calculating the fair values of the Company’s stock options. Estimates
of fair value are not intended to predict actual future events or the value
ultimately realized by persons who receive equity awards.
The following assumptions were used to
estimate the fair market value of options granted using the Black Scholes
valuation method:
|
Six
Months Ended June 30,
|
|
|
2010
|
|
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Dividend
Yield
|
1.26%
|
|
Expected
Volatility
|
46.48%
|
|
Risk
Free Interest Rate
|
1.2%
|
|
Expected
Option Terms (in years)
|
5.0
|
4
The Company recognized share-based
compensation expense of $20,115 and $32,270 in general and administrative
expense for the three months ended June 30, 2010 and 2009 and $57,011 and
$36,770 in general and administrative expense for the six months ended June 30,
2010 and 2009, respectively. Outside of the Company’s stock option
plan, a grant
totaling 60,000 non-qualified options was made in conjunction with business
combination activities (Note 4) during the three months ended June
30, 2010, none of which are currently exercisable. No grants
were made in the first six months of 2009.
Share-based
Incentive Plan
At June 30, 2010, the Company has one
stock option plan that includes both incentive stock options and non-statutory
stock options to be granted to certain eligible employees, non-employee
directors, or consultants of the Company. The maximum number of
shares reserved for issuance is 500,000 shares. The options granted
have six-year contractual terms and either vest immediately or vest annually
over a five-year term.
At June 30, 2010, there were 500,000
shares available for future grants under the above stock option
plan. The weighted average exercise price of options outstanding was
$7.55 at June 30, 2010.
The following table presents the
average price and contractual life information about options outstanding and
exercisable at June 30, 2010:
|
Exercise
Price
|
Number
of Outstanding Shares
|
Weighted
Average Remaining Contractual Life (years)
|
Options
Currently Exercisable
|
Average
Fair Value at Grant Date
|
|
$ 3.41
|
75,500
|
5.51
|
--
|
$ 0.96
|
|
4.76
|
60,000
|
4.96
|
--
|
1.77
|
|
7.15
|
96,000
|
3.51
|
38,400
|
2.74
|
|
9.86
|
63,000
|
1.47
|
63,000
|
4.22
|
|
12.42
|
10,000
|
2.10
|
6,000
|
5.38
|
|
23.10
|
10,000
|
2.68
|
6,000
|
10.77
|
The aggregated intrinsic value of
options outstanding and vested at June 30, 2010 was $105,990 and $0,
respectively. The Company expects 157,341 of the 201,100 options to
vest over their remaining life.
The following table summarizes the
status of Company’s non-vested options since December 31, 2009:
|
Non-Vested Options
|
||
|
Number
of Shares
|
Weighted
Average Fair Value
|
|
|
Non-vested
at December 31, 2009
|
86,800
|
$ 3.42
|
|
Granted
|
135,500
|
1.32
|
|
Vested
|
(21,200)
|
3.50
|
|
Forfeited
|
-
|
-
|
|
Non-vested
at June 30, 2010
|
201,100
|
$ 2.00
|
At June 30, 2010, there was $236,942 of
total unrecognized cost related to non-vested share-based compensation
arrangements granted under the Plan. This cost is expected to be
recognized over a weighted average period of 5.14 years.
4.
Business Combination Activities:
On June 18, 2010, the Company through a
newly created Delaware subsidiary named RMDDxUSA Corp. purchased all of the
outstanding shares of RMDDx Corporation (“RMDDx”), a Prince Edward Island
corporation. The shares were exchanged for 115,033 shares of ART
common stock and options to purchase 60,000 shares at $4.76. These
shares and options were immediately placed in escrow and are released and vested
based upon the achievement of certain performance targets. The
performance targets require client contracts, service volumes and gross sales
with minimum gross margins.
RMDDxUSA
Corp. is the U.S. sales and distribution operations entity for and parent of
RMDDx.
5
RMDDx is
a medical device and diagnostic service company dedicated to the development and
commercialization of medical devices, medical information technology, medical
diagnostics and patient monitoring through wireless, internet and
telecommunication technologies. Since inception, the efforts have
been devoted to the development of remote wireless medical technology for heart
monitors. To date, RMDDx had no revenues.
The fair
value of the assets acquired and liabilities assumed in the acquisition on June
18, 2010 is as follows:
|
Assets
|
||||
|
Current Assets
|
$ | 17,357 | ||
|
Fixed Assets
|
83,381 | |||
|
Deferred Tax
Assets
|
165,872 | |||
|
Other Assets
|
512,483 | |||
|
Total
Assets
|
$ | 779,093 | ||
|
Liabilities
|
||||
|
Current
Liabilities
|
$ | 82,254 | ||
|
Total
Liabilities
|
$ | 82,254 | ||
RMDDx has
a deferred tax asset related to losses prior to the close of the
transaction. The deferred tax asset is for Canadian and Provincial
corporate income taxes. A valuation allowance of 20% was applied to
the tax asset based on projected ability to utilize the tax benefit in the time
allowed. If in the future this valuation allowance is reduced, the
tax expense of RMDDx will be reduced for that period.
RMDDx has
$510,833 in cash which is restricted as it collateralizes a guarantee on a
stand-by letter of credit related to a Canadian Federal contracting economic
incentive program involving an unrelated third party. Using the
judgments of management in the fair market valuation required by ASC 805
“Business Combinations”, over the next 5 years the targets of the incentive
program are expected to be achieved. These calculations and the
associated assumptions are the basis for not including a contingent liability
related to the guarantee. Any time before the period ends, RMDDx has
the right to issue its own guarantee and remove the restriction currently on the
cash. The Province of Prince Edward Island (the Province), through an
economic incentive program, has committed expense reimbursements up to $585,000
to the company in the form of a labor and equipment rebate. No
material rebate has been earned prior to the acquisition.
The
common stock was issued from treasury, and the options were issued outside of
the Company’s existing stock option plan. The fair value of the
options was determined by using the Black Scholes valuation methods described in
Note 3. The fair value of the equity issued was determined based on
the probability of the management of RMDDx meeting the performance targets
required for the release and vesting of shares and options. In
compliance with ASC 805-30-30-1, a fair value of the equity was determined to be
$550,551 and was calculated by discounting the targets outside of a 12 month
period with an estimate of the probability of attainment. The
determination of probabilities was made using the same assumptions used
throughout the purchase accounting.
In
compliance with 805-30-25-2, this transaction was deemed a “bargain purchase”
with the resulting gain of $146,288 booked as other income in the current
period. In the three months ended June 30, 2010, this increase to
other income offsets the general and administrative costs related to the
transaction of approximately $80,000.
5.
Income Taxes:
The Company accounts for income taxes
in accordance with ASC 740 “Income Taxes,” which requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using tax rates in effect for the year in which the
differences are expected to reverse.
The Company files income
tax returns in the U.S. Federal jurisdiction and various state
jurisdictions. The periods from 2006 to 2009 remain open to
examination by the IRS and state jurisdictions. The Company
believes it is not subject to any significant tax risk. The Company
does not have any accrued interest or penalties associated with any unrecognized
tax benefits, nor were any interest expenses recognized during the six months
ended June 30, 2009 and 2010.
6
6.
Earnings per share:
In accordance with ASC 260, the basic
earnings per share is computed by dividing net income available to common
stockholders by the weighted average number of common shares
outstanding. Diluted earnings per share is computed similar to basic
earnings per share except that the denominator is increased to include the
number of additional shares that would have been outstanding if the potential
shares had been issued and if the additional shares were dilutive. At
June 30, 2010, 179,000 of the stock options were anti-dilutive and excluded in
the earnings per share computation.
7.
Recent Accounting Pronouncements:
In
October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13,
“Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”). ASU
2009-13 establishes the accounting and reporting guidance for arrangements
including multiple revenue-generating activities, and provides amendments to the
criteria for separating deliverables, measuring and allocating arrangement
consideration to one or more units of accounting. The amendments in
ASU 2009-13 also establish a selling price hierarchy for determining the selling
price of a deliverable. Significantly enhanced disclosures are also
required to provide information about a vendor’s multiple-deliverable revenue
arrangements, including information about the nature and terms, significant
deliverables, and its performance within arrangements. The amendments
also require providing information about the significant judgments made and
changes to those judgments and about how the application of the relative
selling-price method affects the timing or amount of revenue
recognition. The amendments in ASU 2009-13 are effective
prospectively for revenue arrangements entered into or materially modified in
the fiscal years beginning on or after June 15, 2010. Early
application is permitted. The Company is currently evaluating the
potential impact, if any, the adoption of ASU 2009-13 will have on its financial
position or results of operations.
Forward-Looking
Statements
Any
forward looking statements made herein are based on current expectations of the
Company that involve a number of risks and uncertainties and should not be
considered as guarantees of future performance. These statements are
made under the Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995. Forward looking statements may be identified by
the use of words such as “expect,” “anticipate,” “believe,” “intend,” “plans,”
“predict,” or “will”. Although the Company believes that management’s
expectations are based on reasonable assumptions, the Company can give no
assurance that management’s expectations will materialize. Many
factors could cause actual results to differ materially from any forward looking
statements. Several of these factors include, without limitation:
management’s ability to maintain the current pricing model and/or decrease the
cost of sales; continued availability of supplies or materials used in
manufacturing at competitive prices; volatility in commodity and energy prices
and management’s ability to offset higher costs with price increases; adverse
regulatory developments in the U.S. or any other country the Company plans to do
business in; the costs inherent with complying with new statutes and regulations
applicable to public reporting companies, such as the Sarbanes-Oxley Act
of 2002; variability of customer delivery requirements; the Company’s
ability to efficiently integrate future acquisitions and other new lines of
business that the Company may enter in the future, if any; and other risks
referenced from time to time elsewhere in this report and in the Company’s
filings with the SEC.
The
Company is under no obligation and does not intend to update, revise or
otherwise publicly release any revisions to these forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of any unanticipated events. More information about
factors that potentially could affect the Company's financial results is
included in the Company's filings with the Securities and Exchange Commission,
including its Annual Report on Form 10-K for the year ended December 31,
2009.
Overview
Arrhythmia
Research Technology, Inc. (“ART”) is engaged in the licensing of medical
software, which acquires data and analyzes electrical impulses of the heart to
detect and aid in the treatment of potentially lethal
arrhythmias. RMDDxUSA Corp. (“RMDDx”), a wholly owned subsidiary of
ART, performs US Sales and distribution operations for its subsidiary, RMDDx
Corporation. RMDDx is a development stage organization dedicated to
the development and commercialization of medical devices, medical information
technology, medical diagnostics and remote patient monitoring through wireless,
internet and telecommunication technologies. Micron Products, Inc.
(“Micron”), a wholly owned subsidiary of ART, is the primary source of
consolidated revenues. This primary source of revenue relates to the
manufacturing of components, devices and equipment primarily for the medical and
defense industries. The single largest product category of revenue
relates to Micron’s production and sale of silver/silver chloride coated and
conductive resin sensors used as component parts in the manufacture of
integrated disposable electrophysiological sensors. These disposable
medical devices are used worldwide in the monitoring of electrical signals in
various medical applications. In an effort to leverage current
skills, the Company has expanded into custom thermoplastic injection molded
products and product life cycle management. This category includes
revenues from both high volume precision injection molding and custom injection
molding. With the addition of a medical machining cell, the Company
began production of patient specific metal medical
devices. Management continues to identify complementary and/or
synergistic products, technologies and lines of business in an effort to broaden
the Company’s offerings.
7
Results of
Operations
Revenue
for the three months ended June 30, 2010 was $5,782,279 versus $5,371,439 for
the three months ended June 30, 2009, an increase of 7.7%. Revenues
related to the customization of the Company’s SAECG product accounted for
$50,000 in the three months ended June 30, 2010. Micron’s medical
sensors and snaps with silver surcharge revenue increased by $855,000 and high
volume precision molded products and other miscellaneous sales decreased by
$68,000. The increase in revenues from sensors and snaps is due to
increased volume in sensors and higher silver surcharge. Revenue from
the Micron Integrated Technology’s (MIT) product life cycle management programs
decreased $426,327. MIT’s revenue is derived from the custom molding,
precision metal machining and mold making activities. The
revenue declines reflect timing delays with a defense industry product line and
lower tooling sales partially offset by increases in medical molding and
precision machining. RMDDx did not contribute to revenues for the
three months ended June 30, 2010.
Revenue
for the six months ended June 30, 2010 was $11,367,639 versus $10,054,893 for
the six months ended June 30, 2009, an increase of 13%. Revenues
related to the customization of the Company’s SAECG product accounted for
$100,000 in the six months ended June 30, 2010. Micron’s medical
sensors and snaps with silver surcharge revenue increased by $1,207,904 and high
volume precision molded products and other miscellaneous sales decreased by
$14,979. The increase in revenues from sensors and snaps is due to
increased volume in sensors and higher silver surcharge. Revenue from
the Micron Integrated Technology’s (MIT) product life cycle management programs
increased $19,822. MIT’s revenue is derived from the custom molding,
precision metal machining and mold making activities. The
revenue increases reflect higher volume of defense industry products, custom
molding and precision machining partially offset by lower tooling
sales. RMDDx did not contribute to revenues for the six months ended
June 30, 2010.
Revenue
from domestic and foreign sales for the first three and six months is as
follows:
|
Three
Months Ending June 30,
|
Six
Months Ending June 30,
|
|||||||||||||||||||||||||||||||
|
2010
|
%
|
2009
|
%
|
2010
|
%
|
2009
|
%
|
|||||||||||||||||||||||||
|
United
States
|
$ | 2,930,635 | 51 | $ | 3,505,679 | 65 | $ | 6,038,855 | 53 | $ | 6,121,668 | 61 | ||||||||||||||||||||
|
Canada
|
1,414,690 | 25 | 873,421 | 16 | 2,754,700 | 24 | 1,820,099 | 18 | ||||||||||||||||||||||||
|
Europe
|
655,997 | 11 | 571,091 | 11 | 1,145,159 | 10 | 1,372,637 | 14 | ||||||||||||||||||||||||
|
Pacific
Rim
|
419,066 | 7 | 176,045 | 3 | 810,362 | 7 | 327,475 | 3 | ||||||||||||||||||||||||
|
Other
|
361,891 | 6 | 245,203 | 5 | 618,563 | 6 | 413,014 | 4 | ||||||||||||||||||||||||
|
Total
|
$ | 5,782,279 | 100 | $ | 5,371,439 | 100 | $ | 11,367,639 | 100 | $ | 10,054,893 | 100 | ||||||||||||||||||||
The increase of sales in Canada is due
to increasing volumes with existing customers. A European customer
has begun to shift its manufacturing to the Pacific Rim.
Cost of sales
was $4,687,802 or 81.1% for the three months ended June 30, 2010 as
compared to $4,496,306 or 83.7% for the same period in 2009. Cost of
sales was $9,289,014 or 81.7% for the six months ended June 30, 2010 as compared
to $8,235,447 or 81.9% for the same period in 2009. The reduction of
costs remains a priority of management. The increased cost of silver
negatively affects margins as the higher cost increases both the revenues and
cost of sales. The cost of sales excluding silver has improved more
than 35%. The cost improvements were the result of the ongoing lean
manufacturing projects and capital investment. Management continues
to investigate ways to improve the overall gross margin by elimination of low
contribution products while increasing sales of higher margin
products.
Selling and
marketing expense
was $255,637 for the three months ended June 30, 2010 as compared to $183,729
for the same period in 2009. The selling and marketing expense was
4.4% of sales in the three months ended June 30, 2010 and 3.4% for the same
period in 2009. Selling and marketing expense was $413,626 for the
six months ended June 30, 2010 as compared to $334,180 for the same period in
2009. The selling and marketing expense was 3.6% of sales in the six
months ended June 30, 2010 and 3.3% for the same period in 2009. New
business development efforts in ART including an additional resource and higher
than usual travel and trade show expenses impacted the expense in the quarter
and year to date. As a percentage of sales, selling expenses,
excluding efforts related to RMDDx, is expected to remain stable for the
remainder of 2010.
8
General and
administrative expense was $671,862 for the three months ended June 30,
2010 as compared to $512,391 for the same period in 2009. The general
and administrative expense was 11.6% of sales in the three months ended June 30,
2010 and 9.5% for the same period in 2009. General and administrative
expense was
$1,275,859 for the six months ended June 30, 2010 as compared to $1,087,895 for
the same period in 2009. The general and administrative expense was
11.2% of sales in the six months ended June 30, 2010 and 10.8% for the same
period in 2009. Approximately $80,000 was expended in the due
diligence and transactional costs in the merger and acquisition activities in
the three months ended June 30, 2010. The other increased expenses
included bad debt expense, personnel costs, and RMDDx’s travel and
administrative expenses. As of the June 30, 2010 measurement date,
the Company is not an accelerated filer; therefore, the expense related to
auditor attestation for Section 404b of the Sarbanes-Oxley Act of 2002 will not
be incurred in 2010.
Research and
development expense was $47,138 for the three months ended June 30, 2010
as compared to $57,716 for the same period in 2009. The research and
development expense was 0.8% of sales in the three months ended June 30, 2010 as
compared to 1.1% in the same period in 2009. Research and development
expense was
$102,811 for the six months ended June 30, 2010 as compared to $126,463 for the
same period in 2009. The research and development expense was 0.9% of
sales in the six months ended June 30, 2010 as compared to 1.3% in the same
period in 2009. Less than 50% of the expense was related to ART’s
SAECG software, Predictor™. The customization of the software is paid
by ART’s customers, and therefore is included as a cost of goods
sold. The remaining portion of the research and development expense
is associated with continued work on process improvements to Micron’s sensor and
snap product line. This work is expected to continue through the end
of 2010.
Other income
(expense), net was $144,647 versus expense of ($5,377) for the three
months ended June 30, 2010 and 2009, respectively. Interest income in
the period ended June 30, 2010 was offset by a gain on the disposal of assets of
$1,413 compared with a gain on disposal of assets of $400 and interest expense
of $10,081 associated with an equipment note in the period ended June 30,
2009. The acquisition of RMDDx resulted in a onetime non-cash gain of
$146,288 in the period due to purchase accounting.
Income taxes
as a percent of income before income taxes were 17% and 25% for the three
and six months ended June 30, 2010 as compared to 34% and 37% for the same
period in 2009. The difference was primarily the result of the tax
treatment of the gain from the purchase accounting, but also includes tax
credits earned or expected for the year ended December, 31
2010. Management will continue to seek to implement any tax planning
opportunities that could effectively reduce the Company’s income tax obligations
in the future.
Liquidity and Capital
Resources
Working
capital was $8,759,356 at June 30, 2010 compared to $8,922,328 at December 31,
2009, a decrease of $162,972. Capital investment and the dividend
payment exceeded the operating cash flow. Capital investment will
continue to decrease working capital with any significant investment resulting
from future acquisition of assets or businesses, significant expansion of
production capacity, a medical study, or further software
development. Additionally, capital investment in manufacturing
equipment and medical devices is expected to reduce working capital over the
near term.
Accounts
receivable remained higher than normal as of the end of the first and second
quarters of 2010. The higher than normal balance is not the result of
material changes in terms or collections but rather distribution of sales during
the quarter. The timing of the company’s sales continues to be
highest in the third month of the quarter instead of a historically even
distribution.
Net
capital expenditures were $840,869 for the first six months of 2010 as compared
to $634,572 for the same period in 2009. The largest portion of the
capital expenditures in first six months of 2010 resulted from the routine
replacement and upgrade of production equipment and tooling on the sensor
product line. Capital expenditures for the six months ended June 30,
2010 were made with cash on hand.
The
Company’s subsidiary, RMDDx, has $511,208 in cash which is restricted as it
collateralizes a guarantee on a stand-by letter of credit related to a Canadian
Federal contracting economic incentive program involving an unrelated third
party.
9
The
Company has an unsecured $2,000,000 credit line with a large multinational
bank. The agreement provides for borrowings up to 80% of eligible
accounts receivable plus 50% of raw material and finished goods
inventories. This facility has no borrowing base
charge. The agreement contains covenants that apply upon drawing on
the line. The covenants relate to various matters including notice prior to
executing further borrowings and security interests, merger or consolidation,
acquisitions, guarantees, sales of assets other than in the normal course of
business, leasing, changes in ownership and payment of dividends. No
funds have been drawn down on the line as of June 30, 2010.
On
December 31, 2009, the Company received a reimbursement of $677,810 for a sale
lease-back transaction related to new production equipment installed during the
second half of 2009. This arrangement included a lease line with a
credit limit of $1,000,000. The Company used the remaining $322,190
for the purchase of certain production equipment in the first six months of
2010. The lease has a term of five years.
The
Company expects to meet cash demands for its operations at current levels with
current operating cash flows for the foreseeable future.
During
the quarter ended June 30, 2010, the Board of Directors declared and paid a cash
dividend of $0.06 per share for a total of $161,328. On July 21,
2010, the Board of Directors declared an additional cash dividend of $0.06 per
share for holders of record on August 16, 2010 payable on August 31,
2010.
In
October 2008, the Company’s Board of Directors authorized the repurchase in the
open market from time to time of up to $650,000 of the Company’s outstanding
stock. To date an aggregate of 36,199 shares were purchased under the
program for an aggregate of $87,163. No purchases were made in the
first six months of 2010.
Critical Accounting
Policies
The
preparation of financial statements and related disclosures in conformity with
generally accepted accounting principles requires management to make judgments,
assumptions and estimates that affect the amounts reported. Certain
of these significant accounting policies are considered to be critical
accounting policies, as defined below.
A critical accounting policy is defined
as one that is both material to the presentation of the Company’s financial
statements and requires management to make difficult, subjective, and complex
judgments that could have a material effect on the Company’s financial condition
and results of operations. Specifically, critical accounting
estimates have the following attributes: 1) the Company is required to make
assumptions about matters that are highly uncertain at the time of the estimate;
and 2) different estimates the Company could reasonably have used, or changes in
the estimate that are reasonably likely to occur, would have a material effect
on the Company’s financial condition or results of operations.
Estimates
and assumptions about future events and their effects cannot be determined with
certainty. The Company bases its estimates on historical experience
and on various other assumptions believed to be applicable and reasonable in the
circumstances. These estimates may change as new events occur, as
additional information is obtained and as the Company’s operating environment
changes. These changes have historically been minor and have been
included in the consolidated financial statements as soon as they became
known. In addition, management is periodically faced with
uncertainties, the outcomes of which are not within its control and will not be
known for prolonged periods of time. These uncertainties are
discussed in the section above entitled “Forward-looking
Statements.” Based on a critical assessment of its accounting
policies and the underlying judgments and uncertainties affecting the
application of those policies, management believes that the Company’s
consolidated financial statements are fairly stated in accordance with generally
accepted accounting principles, and present a meaningful presentation of the
Company’s financial condition and results of operations.
Management
believes that the following are critical accounting policies:
Revenue Recognition and Accounts
Receivable
The
Company recognizes revenue upon product shipment or customer acceptance of
completion of service provided, with persuasive evidence of an arrangement, the
fee is fixed or determinable, and collectability of the related receivable is
reasonably assured.
Based on
management’s on-going analysis of accounts receivable balances, and after the
initial recognition of the revenue, as to any event that adversely affects the
ultimate ability to collect the related receivable, management will record an
allowance for bad debts. Bad debts have not had a significant impact
on the Company’s financial position, results of operations and cash
flows.
Stock-Based Compensation
The
Company accounts for share based compensation under ASC 718, “Stock
Compensation” (“ASC 718”). ASC 718 requires that companies recognize and measure
compensation expense for all share-based payments at the grant date based on the
fair market value of the award. This share-based compensation expense
must be included in the Company’s statement of operations over the requisite
service period.
10
The
Company uses the Black-Scholes option pricing model which requires extensive use
of financial estimates and accounting judgment, including the expected
volatility of the Company’s common stock over the estimated term, and estimates
on the expected time period that employees will retain their vested options
prior to exercising them. The use of alternative assumptions could
produce significantly different estimates of the fair value of the stock-based
compensation and as a result, provide significantly different amounts recognized
in the Company’s statement of income.
Inventory and Inventory
Reserves
The
Company values its inventory at the lower of average cost or
market. The Company reviews its inventory for quantities in excess of
production requirements, obsolescence and for compliance with internal quality
specifications. Any adjustments to inventory would be equal to the
difference between the cost of inventory and the estimated net market value
based upon assumptions about future demand, market conditions and expected cost
to distribute those products to market.
The
Company maintains some reserve for excess, slow moving, and obsolete
inventory. A review of inventory on hand is made at least annually
and some obsolete inventory is scrapped and/or recycled. The review
is based on several factors including a current assessment of future product
demand, historical experience, and product expiration.
Deferred
Tax Assets
The
Company assesses its deferred tax assets based upon a more likely than not to be
realized criteria. The Company considers future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance. In accordance with ASC 740 we recognize the
benefits of a tax position if that position is more likely than not to be
sustained on audit, based on the technical merit of the position.
Asset
Impairment – Goodwill
The
Company reviews the valuation of goodwill and intangible assets to assess
potential impairments. Management reassesses the useful lives of
other intangible assets with identifiable useful lives in accordance with the
guidelines set forth in ASC 350, “Intangible Assets”. The value
assigned to intangible assets is determined by a valuation based on estimates
and judgment regarding expectations for the success and life cycle of products
previously acquired or others likely to be acquired in the future. If
the actual sale of product and market acceptance differs significantly from the
estimates, management may be required to record an impairment charge to write
down the asset to its realizable value. To test for impairment, a
present value of an estimate of future cash flows related to goodwill or
intangible assets with indefinite lives are calculated and compared to the value
of the intangible asset during the first quarter annually. When
impairment exists it could have a material adverse effect on the Company’s
business, financial condition and results of operations. Annual
testing was completed on March 31, 2010 and no impairment of goodwill was
required.
Asset
Impairment – Long Lived Assets
The
Company assesses the impairment of long-lived assets and intangible assets with
finite lives whenever events or changes in circumstances indicate that the
carrying value may not be fully recoverable. When the Company’s
management determines that the carrying value of such assets may not be
recoverable, management generally measures any impairment on a projected
discounted cash flow method using a discount rate determined by management to be
commensurate with the risk inherent in its current business model.
Not
applicable.
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this Quarterly Report, the Company’s management,
with the participation of the Company’s Chief Executive Officer and Chief
Financial Officer (“the Certifying Officers”), conducted evaluations of the
Company’s disclosure controls and procedures as defined under Sections 13a –
15(e) and 15d – 15(e) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). Based on this evaluation, the Certifying Officers have
concluded that the Company’s disclosure controls and procedures were effective
to ensure that material information is recorded, processed, summarized and
reported by management of the Company on a timely basis in order to comply with
the Company’s disclosure obligations under the Exchange Act and the rules and
regulations promulgated thereunder.
11
Changes
in Internal Control over Financial Reporting
Further,
there were no changes in the Company’s internal control over financial reporting
during the Company’s second fiscal quarter that materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
|
(a)
|
Exhibits
|
|
|
3.1
|
Amended
and Restated By-laws(b)
|
|
|
10.43*
|
Employment
agreement between James E. Rouse and the Company dated December 26th,
2006.(c)
|
|
|
10.44*
|
Employment
agreement between David A. Garrison and the Company dated January 1st,
2007.(d)
|
|
|
31.1
|
Certification
of the CEO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) on page
X-1.
|
|
|
31.2
|
Certification
of the CFO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) on page
X-2.
|
|
|
32.1
|
Certification
pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 on page
X-3.
|
|
|
32.2
|
Certification
pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 on page
X-4.
|
|
|
__________________________
|
|
|
*
Indicates a management contract or compensatory plan required to be filed
as an exhibit.
|
|
(a)
|
Incorporated by reference from the
Company’s Registration Statement on Form S-18 as filed with the Commission
in April 1988, Registration Statement No.
33-20945-FW.
|
|
(b)
|
Incorporated by reference from the Company’s Form 8-K as filed with the
Commission May 8, 2009.
|
|
(c)
|
Incorporated by reference from the Company’s Form 8-K as filed with the
Commission on
December 8, 2006.
|
|
(d)
|
Incorporated by reference from the Company’s Form 10-KSB for period ended
December 31, 2006 as filed with the Commission in March of
2007.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
ARRHYTHMIA
RESEARCH TECHNOLOGY, INC.
|
|
|
August
16, 2010
|
By: /s/ James
E. Rouse
|
|
James E. Rouse
|
|
|
President and Chief Executive
Officer
|
|
|
(Principal Executive
Officer)
|
|
|
By: /s/ David A.
Garrison
|
|
|
David A.
Garrison
|
|
|
Executive Vice President and
Chief Financial Officer
|
|
|
(Principal Financial and
Accounting Officer)
|
12
Index to
Exhibits
|
Number
|
Exhibit
|
Page
|